Canadians have to save significantly less than Americans for retirement because they have lower health care costs.
“We have clients who straddle both the Canadian and U.S. jurisdictions,” says Yafa Sakkejha, client relations at the Beneplan Co-operative. “One retiree told me in the U.S. she pays four times what she pays in Canada to get the exact same coverage.”
On average, that client spends $200 in Canada per month for health care and $800 in the U.S., says Sakkejha. In fact, it’s common for Americans to spend $800 to $1,000 per month.
The average 65-year-old retired American couple with Medicare coverage would need to save about $240,000 for retirement, not including long-term care or dental, finds a Fidelity study.
Meanwhile, the Canadian government covers about 70% of expenses for retirees, according to Fidelity.
“Because of the Canadian system, it’s unlikely that someone in retirement will be hit with a catastrophic healthcare bill—that’s the risk in the U.S.,” says Peter Drake, vice president retirement and economic research at Fidelity.
And the other 30%? That’s what Canadians have to pick up—12% for private health insurance, 14% for out-of-pocket expenses (such as over-the-counter medication), and 4% for other costs.
Ratchet down risk
Clients nearing retirement should reduce their equity exposure every five years to preserve capital, says Don Macfarlane, senior financial advisor, Assante Financial Management Ltd.
Most wrap accounts create portfolios with 10% increments (e.g. 60% equities/40% fixed). If the client had total investments of $300,000, a 10% drop every five years might be appropriate, especially if he’s focused on capital preservation.
A client with $5 million in investments, however, would not be as vulnerable to a market downturn because her withdrawals as a percent of capital would be significantly less. Plus, she may have so much cash that she wants to leave a legacy. Therefore, her time horizon is longer.
Clients should also focus on more conservative investments, such as fixed income, according to Macfarlane. Even though Canadian bonds are giving 0% real return, it’s still better than a loss on other alternatives, he says.
“Fixed income can include Canadian government bonds or GICs. Yields on corporate bonds can be a few percentage points higher than government bonds. Using a mutual fund with a currency hedging strategy on foreign government and corporate bonds, for example, can produce relatively steady, positive yields.”
Drake suggests people near retirement divide expenses into essential versus discretionary, and put away funds in case of emergencies—health or otherwise.
Advisors should walk clients through such emergencies and show the impacts on retirement income. If your client’s spouse needs long-term care, for instance, which can cost $25,000 to $30,000 per year, explain what kinds of adjustments the client would need to make.
Clients should also know government programs exist to help subsidize the cost of drugs, such as Ontario Trillium Benefit.
“Sometimes people aren’t aware so they look for other ways to cut their spending in retirement,” says Sakkejha. “It’s far easier to take advantage of these programs than most people think.”
Tell us in the comments what percentage of equities you suggest for your retired clients.